2025 (10) TMI 1228 - AT - Income Tax

Assessee's charitable status upheld; addition under s.11(3) deleted and no contravention of s.13 found; genuineness confirmed

ITAT allowed the assessee's appeal and deleted the addition under s.11(3), holding the assessee was a charitable trust and had furnished agreements ... Addition u/s 11(3) - charitable activity u/s 2(15) - CIT(A) confirmed addition made by AO for disallowing expenditure - HELD THAT:- Undisputedly, the assessee is a charitable trust. The assessee had filed copies of agreement with organization providing repairs and maintenance of educational institutions and construction of Bio-degradable Toilets in various areas and other charitable activities. The said agreement along with reply dated 26.12.2019. The assessee-trust has not paid any donation or grant without any specific utilization instructions to any trust or Institution. Hon'ble High Court of Delhi in CIT vs. Hps Social Welfare Foundation (Delhi HC) [2010 (5) TMI 12 - DELHI HIGH COURT] absolutely no material before the AO to show that the funds given to these NGOs/institutions were used for personal benefit of HCL Perot System or any of its directors. It cannot be said that the finding of fact recorded by CIT(A) and Tribunal upholding genuineness of the donations is perverse, calling for intervention by this Court. No contravention of section 13 of IT Act having been made out and the genuineness of the donations having been accepted by CIT(A) as well as by the Tribunal, there is no ground for interference by this Court under section 260A - Addition deleted. Appeal of assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Assessing Officer and the Commissioner (Appeals) were justified in treating amounts claimed as application of income for charitable purposes as deemed income under Section 11(3) where those amounts were disbursed pursuant to written agreements with other organizations and where the trust retained supervision and access to records. 2. Whether initiation and/or levy of penalty under Section 270A was sustainable in the facts of the case. 3. Whether interest under Section 234B was chargeable on the facts and circumstances of the case. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of addition under Section 11(3) for alleged improper application of income Legal framework: Section 11(3) disallows application of income where amounts are not applied for charitable purposes within the meaning of Section 2(15) and related provisions; Sections 11 and 12 provide exemption for income applied to charitable objects. The distinction between a bona fide application of income through arrangements with third-party institutions and a donation/transfer that results in non-application or diversion is central. Precedent treatment: The Tribunal relied on and followed the principle in the decision referenced from the High Court (CIT vs. Hps Social Welfare Foundation) which sustained the genuineness of disbursements made to NGOs where there was no material showing diversion or personal benefit and where supervising arrangements and records supported application for charitable purposes. Interpretation and reasoning: The Tribunal examined the documentary record (agreements, replies, certificates and supervisory access) and found that the assessee-trust entered into written agreements with other organizations for execution of charitable activities (repairs/maintenance, construction of toilets, etc.), retained supervisory rights including access to financial records, and obtained certificates/reports regarding work done. There was no material to show that payments were made without utilization instructions or were used for non-charitable purposes or personal benefit. The Tribunal held that the Assessing Officer's addition was founded on conjecture and extraneous considerations not supported by adverse material in the record. The Tribunal applied the cited High Court precedent to similar factual matrix and found no contravention of Section 13 or other disqualifying provisions. Ratio vs. Obiter: Ratio - where a charitable trust disburses funds pursuant to detailed written agreements that preserve supervisory control, require reporting, and permit access to accounts, such disbursements constitute application of income for charitable purposes and cannot be disallowed under Section 11(3) absent material showing diversion or misuse. Obiter - observations on the sufficiency of particular documentary items (e.g., monthly reports, CA certificates) are ancillary but support the factual application of the ratio. Conclusion: The addition of Rs. 1,89,64,378 as deemed income under Section 11(3) was illegal; the disbursements were held to be bona fide applications of income for charitable purposes and the ground of appeal against the disallowance is allowed. Issue 2 - Validity of initiation/levy of penalty under Section 270A Legal framework: Section 270A contemplates penalties for under-reporting or misreporting of income; imposition requires establishment of culpable misreporting or under-reporting based on material facts and proper invocation of provisions. Precedent treatment: The Tribunal applied the same evidentiary standard that governs assessment of application of income - penalties cannot be sustained where additions are not legally tenable or are based on conjecture rather than on demonstrable misreporting or concealment. Interpretation and reasoning: Given the Tribunal's finding that the disbursements were applied bona fide for charitable objects and that there was no material indicating diversion or misstatement, the foundational basis for initiating penalty proceedings under Section 270A (i.e., under-reporting or misreporting of income) was absent. The Assessing Officer's action in initiating penalty proceedings was therefore not sustainable in the absence of adverse material supporting a finding of culpable misstatement or concealment. Ratio vs. Obiter: Ratio - penalty under Section 270A is not sustainable where the underlying addition is itself unsustainable on the facts and law and where no material demonstrates culpable misreporting or concealment. Obiter - procedural observations on initiation and conduct of penalty proceedings. Conclusion: The initiation/levy of penalty under Section 270A cannot be sustained on the facts; the ground of appeal against penalty is allowed. Issue 3 - Chargeability of interest under Section 234B Legal framework: Section 234B imposes interest for default in payment of advance tax where tax is payable; applicability depends on existence of assessed tax liability and defaults in advance tax payments. Precedent treatment: The Tribunal treated interest liability as contingent on the validity of the assessment and additions which give rise to tax liability; where additions are deleted, consequent interest cannot stand. Interpretation and reasoning: Since the primary addition under Section 11(3) was found to be illegal and deleted, there was no tax liability arising from that addition to attract interest under Section 234B. The Tribunal observed that interest cannot be levied on a tax amount that is not legally exigible due to deletion of the assessment addition. Ratio vs. Obiter: Ratio - interest under Section 234B cannot be levied in respect of an assessable tax amount that has been disallowed by the Tribunal for want of legal or factual basis. Obiter - procedural observations regarding calculation where partial liabilities remain (not relevant on the facts before the Tribunal). Conclusion: Interest levied under Section 234B in relation to the deleted addition is not sustainable; the ground of appeal against interest is allowed. Cross-reference The conclusions on Issues 2 and 3 are directly linked to and follow from the conclusion on Issue 1: deletion of the Section 11(3) addition removes the factual and legal basis for penalty under Section 270A and interest under Section 234B.